Age of Austerity Nearing End May Boost Global Economy – Bloomberg 12-04-13

Salient to Investors:

The IMF predicts G-7 nations will tighten policy in 2014 by the least since they began in 2011 – at half this year’s pace as the average budget shortfall drops to about a quarter of where it was just 3 years ago.

Jose Ursua at Goldman Sachs said the softening of the fiscal drag will be a major contributor to accelerating US growth in 2014 – to 2.9 percent from 1.7 percent in 2013 – and play an important role in supporting a pick-up in global growth.

Goldman Sachs and Deutsche Bank say the relaxation will help industrial economies almost double their growth in 2014 to 2.2 percent. Goldman Sachs forecasts the S&P 500 will climb to 1,900 at the end of 2014.

Bill Street at State Street Global Advisors said peripheral European economies such as Spain and Greece are getting more control over their budgets,and will reduce the risk premium investors demand to hold their bonds over similarly dated securities – the gap between 10-yr yields for Spain and Germany was 2.37 percent yesterday versus 6.5 percent in July 2012.

The IMF says the primary deficit in the G-7 countries, ignoring interest payments, will fall to 1.2 percent in 2014 versus an average 5.1 percent in 2010, smoothed to ignore large economic swings.

Julian Callow at Barclays said the unprecedented retrenchments between 2010 and 2013 amounted to 3.5 percent of US GDP and 3.3 percent of euro-area GDP. Deutsche Bank estimates US non-farm payrolls would have gained 400,000 a month this year instead of 186,000 without fiscal restraint.

The IMF projects the cyclically adjusted primary deficit for the US will fall to 1.2 percent of GDP in 2014 from 1.9 percent in 2013 and 4.2 percent in 2012.

Nomura said neither Democrats nor Republicans have the appetite for more spending cuts, and changes to the tax code probably won’t come soon – if the negotiations go smoothly, the economy could accelerate faster towards its 3 percent prediction for half2, 2014 and into 2015.

Goldman Sachs predicts greater restraint in emerging markets, including China, Russia, Brazil and India.

Drew Matus at UBS Securities said the lack of a shutdown and a stronger fiscal impulse is a net positive for the Fed next year and expects the Fed will begin tapering in January.

Joseph LaVorgna at Deutsche Bank said state and local government inflation-adjusted spending is 50 percent bigger than the federal sector, and they employ 7 times more people – having declined for 3 years in a row for the first time since WWII, their spending jumped 1.5 percent in Q3, the most since Q2 2009. LaVorgna predicts the US will grow 3.2 percent in 2014 versus 1.8 percent in 2013.

IMF data suggest the euro-region’s adjusted primary budget surplus will rise to 1.4 percent of GDP in 2014 versus 1.1 percent in 2013 and a deficit of 2.6 percent in 2010, with Greece’s shortfall declining to 5.4 percent of GDP from 13.6 percent in 2009.

Giada Giani at Citigroup said the cutting helped deepen the longest recession since the euro began trading in 1999 and led to fatigue among politicians and voters, so with less pressure from bond investors to tackle fiscal excesses, countries will take a break and across the continent, fiscal policy won’t be constrictive for the first time since 2009. Giani said the slowdown in fiscal consolidation is likely to continue in 2014.

Laurence Boone at Bank of America said it may take until 2015 for the drag to really diminish, given that policies implemented in 2013 have yet to take full effect, and predicts the euro-zone economy will expand 0.8 percent in 2014 after shrinking 0.5 percent this year.

Read the full article at http://www.bloomberg.com/news/2013-12-05/age-of-austerity-nearing-end-may-boost-global-economy.html

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